$Unique_ID{COW03380} $Pretitle{296} $Title{Sri Lanka Chapter 3B. Government Policies} $Subtitle{} $Author{Peter R. Blood} $Affiliation{HQ, Department of the Army} $Subject{percent 1980s government land early production tea coconut state output} $Date{1990} $Log{} Country: Sri Lanka Book: Sri Lanka, A Country Study Author: Peter R. Blood Affiliation: HQ, Department of the Army Date: 1990 Chapter 3B. Government Policies Government support for farmers takes several forms, including the provision of credit for producers, the setting of minimum prices for agricultural produce, the building of irrigation works, and the encouragement of internal migration to newly irrigated areas. Since the late colonial period, the government has played a growing role in the provision of credit to smallholders on favorable terms. Until 1986 the main instrument of this policy was the subvention of cooperative societies. Agricultural credit took three forms: short-term loans to farmers for the purchase of seeds and fertilizers; medium-term loans, intended for the purchase of machinery; and long-term loans for capital expenditure on storage, transport, and rice-milling apparatus. The long-term loans were not available for individual farmers, but were used by the cooperative societies to acquire infrastructural facilities. The actual performance of credit provision through cooperatives generally fell short of expectations. Institutional credit did not displace the older sources of credit, such as the village moneylender, friends, and relatives. The inability to repay loans, procedural difficulties, and the existence of unpaid loans already taken from the cooperatives were some reasons given by farmers for preferring noninstitutional credit sources. Another problem with the credit furnished by cooperatives was the high rate of default. This rate may have been attributable partly to real difficulties in repayment, but it also was the result of a widely held impression that government loans were a form of social welfare and that it was not necessary to repay them. The New Comprehensive Rural Credit Scheme implemented in 1986 sought to increase the flow of credit to smallholders. The Central Bank guaranteed up to 50 percent of each loan in the event of losses incurred by banks lending under the program, and eligible farmers received a line of credit for three years. Loans were automatically rescheduled at concessional rates when crops were damaged by events beyond the farmer's control. In 1986 cultivation loans under this program amounted to nearly Rs257 million, about 74 percent for paddy and the rest for other food crops. Another important policy was the Guaranteed Price Scheme, which came into effect in 1942. Under this program the government agreed to purchase rice and some other produce at set prices. The intention was to support the farmer's standard of living. For a period in the early 1970s, when the island was threatened by food shortages, the government ordered peasants to market all of their rice through this scheme and at times set the price at a level lower than that of the free market. This policy had the effect of reducing the incentive to grow rice. The program lost some of its impetus in the 1980s. In 1986 the government set the price below the free-market rate for most of the year. As a result of the policy, purchases under the program accounted for only about 6 percent of the rice crop, mostly from districts where private traders were unwilling to operate because of the poor security situation. Since the 1930s, governments have promoted irrigation works and colonization projects in the dry zone in an attempt to increase rice production and reduce land pressure and unemployment in the more densely settled wet zone. The lack of infrastructure and the prevalence of malaria hampered these programs in the early years. After the near eradication of malaria, increased government investment in infrastructure and enhanced financial support for migrants made the new lands more desirable. Between 1946 and 1971, the proportion of the population living in the dry zone increased from 12 to 19 percent (see Population, ch. 2). At the end of 1968, about 352,000 hectares were under irrigation for rice cultivation; some 178,000 hectares under major storage reservoirs and barrages, and approximately 174,000 hectares in minor irrigation projects. In the 1970s and 1980s, governments pursued major irrigation programs, most notably the Mahaweli Ganga Program, which was lent added impetus and became the Accelerated Mahaweli Program in 1978. The increasing size of the Mahaweli project dwarfed its earlier endeavors. According to the plan, approximately 593,000 hectares of previously arid land would be brought under irrigation by 1992. In 1986 some 76,000 hectares of new land were under cultivation as a result of this project. Other long-standing government policies designed to help farmers included subsidies for fertilizer, seed paddy, and other inputs. Government efforts also partly contributed to the adoption of improved cultivation practices and high-yielding seed varieties in paddy farming in the 1960s. Land Tenure Modern land tenure policy dates from the Land Development Ordinance of 1935, which forbade the transfer of crown lands for purposes of cultivation except to enlarge the landholdings of near-landless or landless peasants. The intent of this ordinance was to help small farmers whose livelihood was seen to be at risk from the exploitation of rich peasants and urban landowners. In 1958 the Paddy Lands Bill was enacted, mainly to benefit the tenant farmers of some 160,000 hectares of paddy land. The bill purported to assist tenants to purchase the land they worked, to protect them against eviction, and to establish a rent ceiling at around 25 percent of the crop. It also established cultivation committees, composed of rice farmers, to assume general responsibility for rice cultivation in their respective areas, including the direction and control of minor irrigation projects. Shortcomings in the law and official indifference in enforcing the act hampered its effectiveness, and many observers termed it a failure. In some regions tenants who tried to pay the lower, official rents were successfully evicted by landlords, and the old rents, often about 50 percent of the produce, remained in force. In the 1980s, however, the rent ceiling of 25 percent was effective in most districts. The Land Reform Law of 1972 imposed a ceiling of twenty hectares on privately owned land and sought to distribute lands in excess of the ceiling for the benefit of landless peasants. Because both land owned by public companies and paddy lands under ten hectares in extent were exempted from the ceiling, a considerable area that would otherwise have been available for distribution did not come under the purview of the legislation. Between 1972 and 1974, the Land Reform Commission took over nearly 228,000 hectares, one-third of which was forest and most of the rest planted with tea, rubber, or coconut. Few rice paddies were affected because nearly 95 percent of them were below the ceiling limit. Very little of the land acquired by the government was transferred to individuals. Most was turned over to various government agencies or to cooperative organizations, such as the Up-Country Co-operative Estates Development Board. The Land Reform Law of 1972 applied only to holdings of individuals. It left untouched the plantations owned by joint-stock companies, many of them British. In 1975 the Land Reform (Amendment) Law brought these estates under state control. Over 169,000 hectares comprising 395 estates were taken over under this legislation. Most of this land was planted with tea and rubber. As a result, about two-thirds of land cultivated with tea was placed in the state sector. The respective proportions for rubber and coconut were 32 and 10 percent. The government paid some compensation to the owners of land taken over under both the 1972 and 1975 laws. In early 1988, the state-owned plantations were managed by one of two types of entities, the Janatha Estates Development Board, or the Sri Lanka State Plantation Corporation. Cropping Pattern Rice cultivation has increased markedly since Independence, although in the late 1980s yields remained well below those of the major rice-producing countries. Much of the improvement came in the late 1970s and 1980s. Rice remained a smallholder's crop, and production techniques varied according to region. In some villages, it was still sown by hand, with harvesting and threshing often engaging the entire family, plus all available friends and relatives. Because no completely perennial sources of water exist, there was uncertainty regarding the adequacy of the supply each year. In the wet zone, flooding and waterlogging was experienced in the 1980s, whereas in the dry zone even the irrigated areas were subject to the possibility of insufficient water. In the mid- and up-country wet zone areas, most fields were sown twice a year in the 1980s; in the dry zone most holdings were sown only once; and in the low-country wet zone the amount of flooding or waterlogging determined whether to plant once or twice. The maha (greater monsoon--see Glossary) crops are sown between August and October and harvested five or six months later; the yala (lesser monsoon--see Glossary) crops sown between April and May and harvested about four or five months later. Despite some increases in productivity, rice output was disappointing in the 1960s and early 1970s. Greater incentives to farmers after 1977 contributed to increases in production. Both the area under cultivation and the yield increased steadily between 1980 and 1985, when annual output reached 2.7 million tons, compared to an annual output of around 1.4 million tons in the early 1970s. In 1986 unfavorable weather and security difficulties led to a slight decline in production. A severe drought affected the crop in 1987, when output was estimated at only 2.1 million tons. Tea is Sri Lanka's largest export crop. Only China and India produce more tea. The plants, originally imported from Assam in India, are grown in the wet zone at low, middle, and high altitudes, and produce a high-grade black tea. The higher altitudes produce the best tea, and terracing is used to eke out the limited area of upper altitude land. Tea cultivation is meticulous and time consuming, requiring the constant and skilled attention of two or three workers per hectare. Because of this requirement, tea is most efficiently grown on estates, based on large capital investment and having a highly organized and disciplined management and labor supply. Because working and living on estates was not attractive to Sinhalese peasants, the labor supply for the tea industry from its inception was provided by Indian Tamil immigrants who lived on the estates. Since independence the number of Sinhalese workers has increased, but in the late 1980s Tamils still dominated this sector (see Ethnic Groups, ch. 2). The performance of the tea industry was disappointing in the 1970s and early 1980s, because of poor producer prices and low productivity. Tea production was 211 million kilograms in 1986, down from 220 million kilograms in 1969. The fundamental problem of the tea estates was the advanced age of the tea bushes. In 1987 their average age was around sixty years and only 15 percent of the total area under tea had been replanted with high-yielding varieties. Replanting had been neglected in the 1960s and 1970s partly because low tea prices and high export duties meant that profit margins were not high enough to make it a profitable enterprise. Between 1972 and 1974, the growing risk of nationalization also discouraged investment. Rubber continues to be an important export crop in the late 1980s. It thrives under plantation conditions in the wet zone, although a significant proportion of the crop is produced by smallholders. Although rubber yields improved greatly in the first twenty years after independence, both the output and area planted with rubber declined in the 1980s. Output fell from 156 million kilograms in 1978 to 125 million kilograms in 1982. Improved prices caused production levels to recover to about 138 million kilograms in 1986. Despite the importance of rubber, a large number of rubber plantations suffer from old age and neglect. The government offered incentives to encourage replanting and improve maintenance procedures. Nevertheless, the area replanted in 1986 was 12 percent less than in 1985. This drop in replanting resulted from a shortage of seeds and the reluctance of farmers to retire land from production at a time of relatively attractive prices. In early 1988, however, the short- and medium-term outlook for world rubber prices was considered good. Most of the coconut production was sold in the domestic market, which consumed about 1.4 billion nuts in the mid-1980s. Most of the rest of the crop, usually between 2 billion and 3 billion nuts, was exported as copra, coconut oil, and desiccated coconut. Local uses for coconut include timber for construction, leaves for thatch and siding, coir for rope and rough textiles, and toddy and arrack for alcoholic beverages. Coconut output fluctuates depending on weather conditions, fertilizer application, and producer prices. In the 1980s, smallholders dominated its production, which was concentrated in Colombo and Kurunegala districts and around the city of Chilaw in Puttalam District. Because of a drought in 1983, production suffered a setback during 1984 and fell to 1.9 billion nuts, its lowest level since 1977. The recovery during 1985 was impressive, leading to the record production of almost 3 billion nuts. This level was itself surpassed in 1986, when production rose a further 3 percent. But the average export price fell by 45 percent in 1985 and by 56 percent in 1986. In 1986 the farm gate price probably fell below the cost of production, and in early 1988 it appeared that fluctuations in the world price of coconut products would remain a problem for the foreseeable future. The 1987 drought was expected to reduce coconut production by at least 20 percent in both 1987 and 1988. Like tea and rubber, the coconut sector suffered from inadequate replanting. Consequently, a large proportion of the trees were old and past optimum productivity levels. The importance of crops other than tea, rubber, and coconut increased after 1970, and in 1986 they accounted for around 51 percent of agricultural output. There was a substantial increase in of minor food crops, including soybeans, chilies, and onions, all of which are grown as subsidiary crops on land irrigated by the Mahaweli project. In the 1960s and earlier, vegetables were imported from India in large quantities, but in the 1980s the island's import requirements were much smaller. Spices, including cloves, nutmeg, cardamom, and pepper, also registered large gains in the 1970s and 1980s. A large proportion of the spice output was being exported in the 1980s. Other crops of importance included corn, millet, sweet potatoes, cassava, dry beans, sesame seed, and tobacco. A wide variety of tropical fruits, including mangoes, pineapples, plantains, and papayas, also were grown; most were consumed in the domestic market. Sugar output increased in the early 1980s, although in 1986 it still accounted for only 11 percent of the domestic consumption. The expansion in sugar took place despite the problems of the state-run sugar mills and their associated sugar lands in Eastern Province, which have been disrupted by civil strife. Two new mills in Western Province accounted for the increase in production, and in early 1988 the outlook for further expansion was good. Industry Industry, including manufacturing, mining, energy, transportation, and construction, accounted for around 38 percent of GNP in 1986. The most important products included refined oil, textiles, gems, and processed agricultural products. Construction and tourism both grew rapidly in the late 1970s and early 1980s, but contracted after the onset of ethnic violence in 1983. State-owned corporations accounted for over 50 percent of total industrial output. An investment promotion zone was established in 1979 with the goal of attracting foreign capital; textile factories accounted for a large proportion of investment there in its early years. The island's electricity supply was mainly fueled by hydropower (see Energy, this ch.). Changing Patterns Sri Lanka developed little industry under British rule, relying instead on the proceeds from agricultural exports to buy manufactured goods from other countries. Most industry during the colonial period involved processing the principal export commodities: tea, rubber, and coconut. Although these sectors remained important, in the 1980s there was a much greater variety of industrial establishments, including a steel mill, an oil refinery, and textile factories. Industrial diversification began in the 1960s with the production of consumer goods for the domestic market. This trend was a consequence of government measures aimed at saving foreign exchange, which made it difficult to import many items that had previously been obtained from overseas. Heavy industries were established in the late 1960s, mostly in the state sector. During the 1970-77 period the state assumed an even greater role in manufacturing, but after the economic reforms of 1977 the government attempted to improve prospects for the private sector. The fastest growing individual sector in the 1980s was textiles, which made up approximately 29 percent of industrial production in 1986. The textiles, clothing, and leather products sector became the largest foreign exchange earner in 1986. Over 80 percent of the manufacturing capacity was concentrated in Western Province, particularly in and around Colombo. Industrial Policies The enactment of the State Industrial Corporations Act of 1957 provided for the reconstitution of existing state enterprises as well as the establishment of new corporations to promote the development of large-scale and basic industries. The period 1958 to 1963 witnessed the first phase in the rapid growth of state industrial corporations. By 1963 fourteen such corporations were engaged in such fields as textiles, cement, sugar, paper, chemicals, edible oils and fats, ceramics, mineral sands, plywood, and leather. By 1974 there were twenty-five state corporations, including such major undertakings as a steel mill and an oil refinery. Despite the 1977 policy shift in favor of the private sector, in early 1988 government-controlled enterprises continued to play a major role in industry. State-owned corporations accounted for nearly 60 percent of total industrial output. The most important public company was the Ceylon Petroleum Corporation, which accounted for about 55 percent of all public-sector production. From the beginning, many industrial corporations in the state sector were troubled by such problems as management inefficiency, technical deficiencies in planning, overstaffing, and defective pricing policies. These difficulties contributed in many undertakings to poor economic results. Moreover, public sector enterprises were associated with objectives that reflected both growth and welfare considerations for the economy as a whole. They became the chief instruments furthering state ownership and social control in the economy, and they were expected to promote capital formation and long-term development. At times they were also looked upon chiefly as major sources of employment and enterprises providing goods and services to the public at relatively low prices. As a result, a number of the state industrial corporations have lost money. In 1987 the debts of state-owned corporations were Rs19 billion, of which Rs15 billion were owed to foreign sources and Rs4 billion to the two state-owned banks. The liberalization of the economy in 1977 was largely prompted by the perceived inefficiency of the public sector, not by any ideological commitment to free enterprise. As a result, the government let private enterprise compete with the state corporations but took few steps to dismantle the state sector. Instead, it attempted to improve its efficiency. One major state venture, the National Milk Board, was dissolved in 1986, however. It had been established in 1953, but had never succeeded in developing the milk industry. In 1987 it was reported that consideration was being given to transferring to private control several state-run industrial enterprises. These included the four government textile mills, the State Distilleries Corporation, the National Paper Corporation, the Mineral Sands Corporation, Paranthan Chemicals, Sri Lanka Tyre, and Union Motors. In early 1988, however, doubts remained about the extent of the government's commitment to this program. Although the plan to sell the textile mills was expected to be implemented within two years, some of the government's economic advisers reportedly were urging the government to proceed cautiously in its privatization policy, in view of the limited capital markets, the concentration of private wealth, and the weak regulatory framework. Manufacturing The share of manufacturing in the economy declined from 21 to 15 percent of GDP between 1977 and 1986. This fall is somewhat misleading because it resulted in large part from the rapid growth in the service sector and the decline in output of the state-owned Ceylon Petroleum Corporation. The latter accounted for as much as one-third of the value of manufactured goods in some years and thus strongly affected aggregate manufacturing statistics. These statistics fluctuated along with changes in the value of the output of the oil refinery, which in turn varied with oil price levels and the extent of plant closings for maintenance. Some manufacturing sectors grew rapidly during this period. Manufacturing was dominated for most of the twentieth century by the processing of agricultural produce for both the export and domestic markets. The most important industries were engaged in preparing and packaging for outside markets the principal export commodities--tea, rubber, and coconuts--for which Sri Lanka is noted. Such preparation generally involved low technology, comparatively modest capital investment on machinery, and uncomplicated, sequential procedures. Tea leaves, for example, follow a four-part process of withering, rolling (to extract bitter juices), fermentation, and heating (or roasting), before being packed in chests for export. The processing of coconut and of rubber also were important industries, although their ratio in proportion to all manufacturing fell in the 1970s and early 1980s. The processing of the latter two commercial crops generally involved refining the basic commodities into a range of semi-finished products to be used in manufacturing finished goods at home or abroad. Coconuts, for example, are transformed into copra, desiccated coconut, coconut oil, fiber, poonac (a meal extract), and toddy. Copra and desiccated coconut are used as oils or as ingredients in food such as margarine; coconut oil is used to make soap; coconut fibers such as coir are used to make yarn, rope, or fishnets, while poonac is used as food for livestock. The coconut palm flower is also used in the production of alcoholic beverages. Rubber is also processed in various ways, including latex or scrap crepe and ribbed or smoked sheet, which together account for much of Sri Lanka's export of this commodity. Processing methods for rubber are outdated, however, and Western consumer countries have protested against the hardness, high moisture content, and inconsistent quality of the Sri Lankan product. Manufacturing received a boost in the early 1960s when import controls, which were the result of shortages in foreign exchange, made it difficult for consumers to obtain or afford foreign products. The result was a protected and profitable ready-made home market. This situation led to an expansion of both private- and public-sector manufacturing, with the private sector concentrating on consumer goods. These new enterprises, however, depended heavily on imported raw materials, and when the country's balance of payments difficulties became even more serious in the early 1970s, industry suffered from the lack of foreign exchange. In 1974 it was estimated that only 40 percent of the capacity of the industrial sector was used. After the 1977 liberalization, raw materials were more freely available, and in 1986 capacity utilization was estimated at 78 percent. In 1978 the government established the Greater Colombo Economic Commission primarily to serve as the authority for the free trade zones to be set up near the capital. The first investment promotion zone consisted of a large tract that was established in 1979 at Katunayaka, near the Bandaranaike International Airport. A second zone was inaugurated in 1986 at Biyagama, in Colombo District. Foreign companies that built factories in the zones received generous tax concessions. The commission succeeded in attracting some foreign investment, especially from Hong Kong and other Asian countries. At the end of 1985, a total of 119 enterprises had signed agreements with the commission, but only 7 were signed in 1986, when there were 72 units in production. The total number of people employed was nearly 42,000. Gross export earnings from the investment promotion zones in 1986 were around Rs5.5 billion, up 43 percent from 1985. Foreign investments outside the free trade zones were coordinated by the Foreign Investment Advisory Committee. The principal change in manufacturing in the 1980s was the rapid growth of the textile sector, from 10.5 percent of output in 1980 to 29.2 percent in 1986 (see table 8, Appendix A). In the mid-1980s, the government was attempting to diversify foreign investment away from textiles. Most textile factories were located in the investment promotion zones. During the July 1983 riots, 152 factories were destroyed, but there was little long-term effect. Some observers expressed the view that the equipment destroyed was inefficient, and that modernization was long overdue. Construction Total expenditure for construction was estimated at 7.7 percent of GDP in 1986. The sector was given a boost by the ambitious public investment program of the government that came to power in 1977. Between 1977 and 1980, construction expanded at an annual rate of 20 percent in real terms. It stagnated in the 1980s as the number of new projects dwindled and the early ones were completed. The largest construction project of the post-1977 period was the Mahaweli irrigation program. Con eived in the 1960s as the Mahaweli Ganga Program, the project originally was expected to bring approximately 364,000 additional hectares of land under irrigation and to provide an extra 540 megawatts of hydroelectric power to the national grid. Completion of the program was to require thirty years. Construction of the first two dams was completed in 1977 and opened about 53,000 hectares of new land to irrigation in a general area south of the old capital of Anuradhapura in the dry zone. When the United National Party swept into power in 1977, the project was given renewed impetus and renamed the Accelerated Mahaweli Program. Construction work was undertaken at five new sites between 1979 and 1982, with the intent of increasing the hectares under irrigation and generating an extra 450 megawatts of hydroelectric power for the national grid. By the end of 1987, new dams and reservoirs had been completed at Kotmale, Randenigala, Maduru Oya, and Victoria. The operational power stations at Randenigala and Victoria together generated 330 megawatts of power, with an additional 147 megawatts expected when the Kotmale station came on line. All construction related to the Accelerated Mahaweli Program was scheduled for completion by 1989. The total cost of the entire project was estimated at US$1.4 to 2 billion. The Urban Development Authority was established in 1978 to promote integrated planning and development of important urban locations. Its responsibilities have included the new parliamentary buildings and the reconstruction of St. John's fish market in Colombo. Total expenditure of the Urban Development Authority was Rs529 million in 1986, well under its annual budget in the early 1980s. The Million Houses Program was established in 1984 to coordinate both public and private housing construction. In early 1988 the government's policy was to subsidize private housing rather than undertake extensive public housing programs. Mining Mining is carried out in both the public and private sectors. The most valuable products are precious and semiprecious stones, including sapphires, rubies, cats' eyes, topaz, garnets, and moonstones. Official exchange earnings from gems were negligible in the first two decades after independence because most of the output was smuggled out of the country. The setting up of a publicly owned State Gem Corporation in 1971 and export incentives for those exporting through legal channels brought a marked improvement. In 1986 legal exports were valued at Rs755 million, but many observers believed that a considerable quantity was still being exported illegally. In the late 1980s, Japan remained the most important market for Sri Lanka's gems. The Moors traditionally have played an important role in the industry (see Ethnic Groups, ch. 2). Graphite also is of commercial significance. Almost the entire output is exported as crude graphite (plumbago). Ilmenite, a mineral sand used in the manufacture of paint and the fortification of metals, also is exported. Salt is produced by evaporation for the domestic market. Thorium deposits have been reported in Sabaragamuwa Province and in the beach sands of the northeast and southwest coasts. Exploration also has disclosed the presence of apatite (source of phosphate), dolomite (fertilizer component) and small pockets of economically extractable iron ore. Energy Over 70 percent of the island's total energy consumption was satisfied by firewood, agricultural residues, and animal waste, mostly for household use. The country had no coal or petroleum deposits, and the only other indigenous energy source was hydropower. In 1927 the Department of Government Electrical Undertakings, now called the Ceylon Electricity Board, took over the transmission of electricity throughout the country. Hydroelectric power came into use in 1951 with the commissioning of the Laksapana project in Central Province. Demand for power increased from approximately 20 megawatts in 1951 to nearly 73 megawatts in 1963, about 90 percent of which was met from hydroelectric sources. In the 1970s, the island increasingly came to rely on imported oil for the generation of electricity, but new hydroelectric capacity from the Mahaweli project in the 1980s reduced the importance of oil. In 1986 total installed capacity was 1,010 megawatts, of which 74 percent was from hydropower. In early 1988, it appeared that the Mahaweli project would solve Sri Lanka's electricity supply problem for the foreseeable future. This integrated power generation and irrigation project started contributing to power supplies in 1984 when the first two phases of the Victoria Dam were completed, adding 140 megawatts to installed power capacity. In April 1985, the final stage of the Victoria Dam increased capacity by 70 megawatts. A slightly greater capacity was expected to result in the late 1980s. United States and British-owned oil companies in Sri Lanka were nationalized in 1963, and since then the importing, refining, and distributing of all oil products has been the responsibility of the Ceylon Petroleum Corporation, the state oil company. Its oil refinery started production in 1969. The main products in 1986 were fuel oil (559,497 tons), heavy diesel (60,995 tons), auto diesel (406,569 tons), kerosene (153,692 tons), and gasoline (123,089 tons).